UGBS 205

Fundamentals of Accounting Methods

Week 10 – Depreciation of Tangible Non-Current Assets

College of Humanities
Business School
2016/2017
 Overview
• Non-current assets span more than one accounting year. It is
thus important to spread the cost over the years for which an
organization benefit from the use of the asset. This session
introduces the student to the methods in accounting for the
use of tangible non-current assets.

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 Learning Objectives
• At the end of this session, you should be able to
– Determine the value of tangible non-current assets
– Identify methods of depreciating tangible non-current
assets
– Learn how to calculate depreciation using the two most
widely used methods
– Learn to make entries for depreciation in books of
accounts

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 Reading List
• Read Recommended Text –
- Chapter 12 of Marfo-Yiadom, Asante & Tackie
- Chapters 24, 26 and 27 of Wood & Sangster;
- IAS 16: Property, plant and equipment

• Other Financial Accounting text books available to students

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 Accounting for Non-current Assets

• Non-current asset – This is that asset acquired to be

used in the organisation for a period more than
(normally) one year.

• Such expenditure is referred to as capital expenditure;

that type of expenditure to acquire an asset of a
permanent nature; in contrast to revenue expenditure;
the expenditure to acquire asset that is consumed
within one year, or that exists for only one year.

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Bekoe, Asare, Donkor and Appiagyei, UGBS
 Accounting for Non-current Assets

• Capital expenditure is made for such assets once a while,

not very often; on the other hand, revenue expenditure
items are acquired very often, at least year after year; for
example annual rent, insurance or advertising expenses.

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 Value of non-current assets
• Initial value of any non-current asset is the cost of
the asset, which comprise of;
– the purchase price of the asset
– Carriage inwards on the asset
– any additional/related expenditure incurred to put the
asset in its usable state.

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 The Concept of Depreciation

Depreciation Defined;
It is the systematic allocation of the depreciable
amount of an asset over its useful life (IAS 16).

May be explained as the measure of wearing out,

consumption or other reduction in the useful
economic life of a non-current asset whether arising
from use, efflux of time or obsolescence through
technological or market changes.
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 Causes of Depreciation

• The level of usage

• The passage of time
• Technological obsolescence
• Market Obsolescence

 Any portion of non-current assets that is determined

as having been used or consumed becomes expense.

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 Procedure to Determine & Charge Depreciation

 Determine cost of asset (purchase price/valuation)

 Determine estimated useful life
 Determine estimated residual value of asset
 Depreciation rate can be determined from these
variables

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 Methods for Charging Depreciation

 Different methods are applied based on the type of

asset and usage, or based on the different assumptions
that are made:
2 Common Methods:
 Straight line method
 Reducing balance or diminishing balance method

Other methods; Sum of years’ digits, revaluation method,

machine hour method, depletion unit method

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 Straight line method

• This method is based on the assumption that the asset

is used equally over its useful life.
• Under this method, the annual depreciation charge is
an equal sum.
It is calculated as:

Depreciations = Cost – Residual value

Estimated life

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 Illustration

Cost of Motor Vehicle = GH¢500,000

Estimated life = 5yrs
Residual value = GH¢50,000
Annual Depreciation = GH¢500,000 - GH¢50,000
5
= 450,000
5
= GH¢90,000

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 Reducing balance method
• Reason
– Greater benefit is to be obtained from the early years of
using an asset
– Appropriate to use the reducing balance method which
charges more in the earlier years.
– Helps even out the total amount charged as expense for
the use of the asset each year.

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 Reducing balance method
• Annual Depreciation = Net Book Value x Depreciation Rate

• = (Cost – Accumulated Depreciation) x Depreciation Rate

Example:Cost of Motor Vehicle = GH¢500,000

Depreciation rate is 20% p.a.
Year Depreciation
Year 1 20% * 500,000 = 100,000
Year 2 20% * (500,000-100,000) = 80,000
Year 3 20% * (500,000-180,000) = 64,000

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 Accounting Entries
Purchase of Non-current Asset by cash
DR Asset A/c
CR Cash/Bank
With the cost of the asset
When Depreciation is Charged for the year
DR Depreciation Expense A/c
CR Provision for Depreciation A/c
(Accumulated Depreciation A/c)
With the depreciation charge for the period

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 Accounting Entries
At the end of the year;
– Close off Depreciation Expense a/c to Income Statement
– Balance on provision for depreciation a/c remains as
closing balance (Bal. c/d);
to determine the net book value (NBV) at year end;
cost – provision for depreciation (accumulated
depreciation)

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 Disposal of Non-current Assets

Determine profit or loss on disposal

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